China made clear its stance on cryptocurrency with a crackdown that began in late 2017. The Chinese authorities then and now view decentralized digital currencies as more harmful than useful. From Beijing’s perspective, cryptocurrencies empower non-state actors in the financial system in a way that that they believe aggravates systemic financial risk.
That risk derives from crypto’s ability to disguise capital outflows – something Chinese regulators want to curb, not encourage – and its involvement in money laundering.
That said, crypto bros never miss an opportunity to try and pump up a particular product or jurisdiction when they see it is in their financial interest to do so. For that reason, the rumor mill is filled with talk of China preparing to ease restrictions on digital assets though absolutely no evidence exists to suggest that Beijing is altering its crypto policies.
Fanning The Rumor Mill
During the weekend of January 6-7, the Shanghai Municipal Tax Service published an article online that, among other things, explained levies imposed on digital currency transactions in China. It was not dedicated specifically to digital assets though. The title of the article, since scrubbed from the internet by censors due to attracting too much unwanted attention, is “Common Misunderstandings Regarding Personal Income Tax on Business Income and Categorized Income.”
Before the article was deleted, it spurred rumors that Beijing was preparing to ease its cryptocurrency ban – even though it is not an official policy document and does not suggest any potential change in the country’s cryptocurrency policy. The reference it makes to digital assets is in the form of virtual tokens used in video games. It explains that individuals who obtain virtual currencies from other players through online transactions and generate revenue by selling them at a higher price must pay income tax on such earnings, according to Beijing-based lawyer Guo Zhihao.
While China has denied legal-tender status for cryptocurrencies, it has not – at least not yet – outlawed its attribution as property or a commodity, according to Jin Jianzhi of the Shanghai Mankun law firm. Jin said that under Chinese law, the government can levy taxes on relevant transactions.
Separating Web3 and Crypto
Another common misconception involving China’s crypto policies rests on the assumption that because Beijing has an abiding interest in Web3, that it will accordingly relax its restrictions on decentralized digital currencies. While cryptocurrencies are indeed key building blocks of Web3 in most of the world, that is not the case in China.
On the contrary, China aims to develop a Web3 ecosystem with Chinese characteristics for applications in industries such as energy, the legal field and trade finance. In late December, China’s Ministry of Science and Technology said that it plans to release a Web3 strategy document focusing on issues of inheritance, innovation, security and government obligations, adding that it would “boost interaction between relevant departments to promote Web3 innovation, deploy further research and strengthen talent in the industry.”
Meanwhile, China is preparing to pilot a national, blockchain-based real-name verification system known as the Real-Name Decentralized Identifier (RealDID) system. The project allows users to store public cryptographic keys in a RealDID document published on a blockchain following real-name verification by the police’s Cyber Trusted Identity system. RealDID reportedly aims to strengthen privacy by allowing internet users to log into online platforms without using their personal information like phone numbers.
One Country, Two Systems
Another reason some observers foresee crypto liberalization in China is because Hong Kong is fast-tracking efforts to become a digital assets hub. They reason that the mainland will be next. One of the biggest boosters of this line of thinking is Tron founder Justin Sun, who is prone to making far-fetched connections. For instance, following the United States Securities and Exchange Commission’s (SEC) approval of spot Bitcoin
While we cannot rule out some form of crypto liberalization in the future in mainland China, it remains unlikely for the near and medium terms because Beijing sees very little upside in decentralized digital currencies. China has achieved an impressive level of financial inclusion in a short period of time using government-approved digital financial technology. The advent of the digital renminbi represents another move by the Chinese state to assert control over a fast-digitizing financial and monetary system. Given the significant investment the Chinese government has made in the digital yuan, it is unlikely to welcome decentralized rivals.
Finally, under the one country, two systems model of governance, Hong Kong’s financial system is very different from the mainland’s. It is much more aligned with the broader global financial system. There is no expectation that the mainland and Hong Kong financial systems will converge anytime soon and indeed it is questionable whether doing so would best serve key stakeholders’ interests.
Thus, Hong Kong can be free to develop itself as a cryptocurrency hub just as it has done for banking, alternative investments, and capital markets even if digital assets remain effectively banned on the mainland.